ETF Education: What Are Authorized Participants?

Core Insights - Authorized Participants (APs) are essential for the ETF creation and redemption mechanism, significantly influencing ETF liquidity [1] - APs are typically large financial institutions with substantial buying power, responsible for acquiring the underlying securities that ETFs aim to hold [2][3] - The exchange of securities for ETF shares occurs on a fair-value basis, benefiting both the ETF provider and the AP [4] Role of Authorized Participants - APs facilitate the creation of new ETF shares by purchasing the necessary underlying securities and delivering them to the ETF provider in exchange for ETF shares [3][4] - The process can also work in reverse, allowing APs to redeem ETF shares for the underlying securities, thus impacting the supply of ETF shares in the market [5] Impact on Liquidity - APs help maintain the fair value of ETFs by creating or redeeming shares based on market demand, ensuring that ETF prices align with their net asset value (NAV) [7] - A higher number of APs for a particular ETF enhances competition, which is likely to keep the ETF trading close to its fair value [8]